Economic Incentives

Financial incentives to make methanol a competitive fuel

Demand for methanol

On top of being a fuel source for transporting, cooking, heating, and electricity production, methanol also functions as an ingredient in the production of many chemicals, plastics, and products. Particularly, e-methanol, derived from green, electrolysis-based hydrogen and captured carbon dioxide (CO₂), has a prospective role in the petrochemical industry, possibly replacing many of the fossil fuel bases used to make plastics^[1]Irena and Methanol Institute, “Innovation Outlook: Renewable Methanol,” International Renewable Energy Agency, (2021): 17, … Continue reading. An increase in production of e-methanol over time will result in lowering its final cost as efficiency improves. Greater supply of e-methanol will thus likely be met with substantial demand from other sectors outside of the shipping industry as prices lower.

Current fuels (including gasoline, diesel, jet fuel, and heating oil) cost about 17 USD per gigaJoule (GJ, a unit of energy), while fossil fuel based methanol costs approximately 10-20 USD/GJ, meaning methanol is more cost effective on an energy content basis^[2]Irena and Methanol Institute, 84.  (although, methanol has a lower energy density^[3]​​http://large.stanford.edu/courses/2012/ph240/spearrin2/). Thus, many of the policy incentives to introduce methanol fuel in shipping in the most immediate future should be focused on developing proper ship infrastructure (ie. equipping boats to burn methanol, largely using dual fuel engines^[4]Martin, Abigail. “A Step Forward for ‘Green’ Methanol and Its Potential to Deliver Deep GHG Reductions in Maritime Shipping.” The International Council on Clean Transportation, September 1, … Continue reading). However, once ships are equipped to burn methanol, focus should be turned to developing green methanol production infrastructure, utilizing biomass or renewable electricity for hydrogen production and carbon capture technologies for CO₂ supply. Green methanol includes methanol produced from renewable sources, such as from biomass. E-methanol, as introduced above, is a specific type of green methanol that is formed from renewably sourced hydrogen and captured CO₂. Improving efficiency and expanding production is critical considering current production costs for e-methanol sit between USD 800-1600 per tonne(t), for biomethanol between USD 300-800/t, and for fossil-based methanol between USD 100-250/t^[5]Irena and Methanol Institute, 85.. 

The figure below shows the range of projected costs of producing bio- and e-methanol, illustrating decreases in production costs, particularly for e-methanol. However, current production cost levels for green methanol types (including bio-methanol, derived from biomass, and e-methanol) are drastically higher than for current fossil-fuel based methanol production, signifying the importance of subsidies and other policies to decrease production costs. 

Policy Action – The Carbon Tax

Currently, renewable energy sources, specifically green methanol, are generally more costly compared to fossil fuels, making the transition to greener fuel sources expensive for shipping companies. To introduce green methanol as a fuel in the shipping industry, economic policy should aim to incentivize the transition of ships to methanol-accepting engines and, more significantly, to scale up green methanol production. Many bunkering technologies are already in place to account for methanol fuel specifically at ports, so focus should be on the production side. Note that it costs about 340-470 USD/kW to retrofit a large (10-25 megawatt) dual-fuel methanol/diesel engine in a ship, while it costs 1,300 USD/kW to retrofit engines to liquified natural gas fuel, a methanol competitor (prices converted by 1 £ = 1.34 USD) ^[7]Andersson, Karin, and Carlos Márquez Salazar. Methanol as a Marine Fuel Report. Methanol Institute, October 2015. … Continue reading. Considering, however, that the cost of fuel accounts for 50% or more of ship operation costs ^[8]Andersson, Karin, and Carlos Márquez Salazar. Methanol as a Marine Fuel Report. Methanol Institute, October 2015. … Continue reading, lowering green methanol prices (perhaps, relative to other carbon-intensive fuels) is key in transitioning away from fossil fuels, whose emissions significantly contribute to climate change. Lowering input costs, specifically costs associated with CO₂ (sourced largely from carbon capture, or the collection of carbon oxides from the atmosphere) and hydrogen production (largely from sustainably powered electrolysis, or the splitting of water to produce H₂ using electricity), may decrease green methanol prices and make it more competitive in the fuel industry. In order for the production system to be renewable, however, both carbon capture processes and electricity-based hydrogen production need to also be powered by renewable sources, such as wind or solar power. Subsidies, or allocations of funds by governments to a given industry to jumpstart growth, towards these industries should decrease input costs and, thus, green methanol costs, presenting a more attractive fuel source to ship owners. One way to obtain revenue to subsidize the green hydrogen and carbon capture industries is through carbon taxes.

Carbon taxes, charges on shipping companies per weight unit (usually tons) of carbon emitted, aim to incentivize a decrease in carbon emissions internationally. By implementing a carbon-based tax, ship owners would be incentivized to invest in greener technologies and fuels to avoid the tax. The cost of implementing new technologies would become less than the cost of paying the carbon tax. Ship owners that are able to adapt would be able to ship more at a lower cost (thus, gaining more profit) relative to those who do not adopt greener technologies.

The carbon tax is currently being considered on regional and international scales. Many shipping organizations, including the International Chamber of Shipping, BIMCO, and the World Shipping Council, have already expressed the need for international carbon taxes ^[9]Josephs, Jonathan. “Climate Change: Shipping Industry Calls for New Global Carbon Tax.” BBC News. BBC, April 21, 2021. https://www.bbc.com/news/business-56835352. . Such industry representatives are actively calling upon governments and key intergovernmental organizations such as the IMO to establish such a tax. Note, however, that a regional carbon tax may adversely affect the companies within said region, as the tax would increase operation costs and decrease their shipping capacity relative to companies outside of the region that are not taxed. A universal carbon tax, however, could limit such inter-regional competition. Additionally, considering the global scope of climate change, as emitted carbon will affect different areas than where it was emitted, a universal tax would hold companies accountable for their contribution to global climate change and environmental degradation.

Equity concerns introduced by a carbon tax, however, need to be addressed, particularly as a carbon tax might impact more vulnerable nations more than others and smaller ship owners more than larger companies. This is because smaller companies would find it more difficult to cultivate the funds to invest in expensive technologies to transition away from fossil fuels due to the smaller scale and profit of their operations. On a related note, under-resourced nations and their constituents may not be able to divert funds towards investing in greener technologies, and competition with wealthier nations would be even harsher.

When studying international container shipping, Tsung-Chen Lee et al. discovered that a maritime carbon tax will not result in a significant negative economic impact, excluding the highest taxation rates, meaning lower and medium tax rates will have limited negative effects ^[10]Lee, Tsung-Chen, Young-Tae Chang, and  Paul T.W. Lee. “Economy-wide impact analysis of a carbon tax on international container shipping.” Transportation Research Part A: Policy and Practice, … Continue reading. Also, the impacts of a carbon tax will be variable depending on the volume of goods. For instance, shipping over more distant routes will become relatively more expensive than for shorter distances. As long distance shipping becomes more expensive, prices of products from distant sources will increase, causing demand for those products to fall while demand for local products may increase. This can be seen as problematic or beneficial: while the complex shipping route system will change, a shift to local buying might be observed ^[11]Lee, Tsung-Chen, Young-Tae Chang, and Paul T.W. Lee. “Economy-wide impact analysis of a carbon tax on international container shipping.” Transportation Research Part A: Policy and … Continue reading. Local buying decreases the environmental footprint of consumption by decreasing the amount of fuel needed and lowering contribution to traffic and congestion that may lead to furthered emissions. It is also observed that local buying can lead to less urban sprawl, while also decreasing environmental effect due to production and packaging waste. ^[12]Parry, Ian, Dirk Heine, Kelley Kizzier, and Tristan Smith. “Carbon Taxation for International Maritime Fuels: Assessing the Options.” IMF Working Papers 18, no. 203 (2018): 1. … Continue reading Finally, the cost of a carbon tax experienced by consumers is minute; Maersk’s chief executive Soren Skou asserts that the tax will “translate into something like six cents per pair of sneakers” ^[13] Josephs, Jonathan. “Maersk: Consumers Can Foot Shipping’s Climate Change Bill.” BBC News. BBC, February 19, 2021. https://www.bbc.com/news/business-56126559.. 

The practical implementation of a carbon tax would be relatively simple, as the IMO already collects fuel consumption records and would simply apply the tax rate to such data. Determining the rate and its flexibility, however, will be a challenge, both politically and technically. As mentioned above, one of the benefits of a carbon tax is that revenue produced from the tax can be allocated in a number of ways, such as towards climate finance, funding for technology, or other projects within the maritime industry. It is recommended that revenue is allocated towards implementing greener technologies and systems within the shipping industry, such as by distributing funds towards clean hydrogen production.